A ban on upward-only rent reviews is now law as English Devolution and Community Empowerment Act has received Royal Assent, a move that experts say could have a profound effect on the UK real estate market.
In a complete surprise to the UK real estate industry, the government announced plans to ban upward-only rent reviews for commercial leases in July as part of the Bill.
But it is the move to ban upward-only rent reviews that has concerned real estate practitioners move.
Upward-only rent reviews are common in UK commercial leases and mean the rent can only increase or stay the same at review. The ban on these clauses in commercial leases applies to England and Wales only. The government has said these "pit landlords against businesses and can make rents unaffordable and cause shops to shut".
It has added: "This will help keep small businesses running, boost local economies and job opportunities and help end the blight of vacant high streets and the unacceptable anti-social behaviour that comes with them."
The change will not affect existing contracts but will ban the introduction of upward-only clauses in new agreements. Landlords will need to choose between agreeing fixed rents or introducing a review clause that allows rents to fall as well as go up.
Other measures in the Act
The wider details of the Bill can be read here. The government says it introduces new measures to expand devolution and empower mayors and local people. For example, a new Community Right to Buy will give local people the first right of refusal for community assets such as shops and community centres when they are put up for sale.
The Act introduces "Strategic Authorities" into law, to make it quicker to devolve powers from Whitehall. Strategic authorities with elected Mayors will receive more powers over transport, planning, housing and economic regeneration.
The Act also establishes Local Scrutiny Committees for mayoral authorities, which will provide scrutiny of local public spending and decision making.
Further measures include mandating Mayoral Strategic Authorities to develop local growth plans. There will be new powers for Mayors to intervene in planning applications of potential strategic importance, make mayoral development orders and charge a mayoral community infrastructure levy on developers.
'Significant step'
Melanie Leech, chief executive, British Property Federation, said today in a statement: “The granting of Royal Assent of the English Devolution Bill marks a significant step forward in creating new structures of governance that can, working with the private sector, exercise genuinely strategic powers over planning, place-making, and regeneration to boost economic growth across all parts of England, whether that be through housing, commercial or mixed-use development.
"Our experience of working with the existing Metro Mayors and Combined Authorities has been broadly positive in that their planning, placemaking and convening powers give larger investors confidence that there will be opportunities at the right scale to encourage major investment into new places, which we hope to see replicated with the new Strategic Authorities. However, we believe that this Act should be the just the starting point for further devolution, including fiscal devolution. The next stage must include a requirement on the new Strategic Authorities to ensure that employment planning, and not just housing, is handled strategically and consistently across local boundaries to reap the full benefits.
“The Act also introduces the controversial ban on upwards-only rent reviews, which, despite significant industry concern, was debated for only 40 minutes in the House of Lords. The government must now keep its promise to consult on the implementation details, including appropriate caps and collars for leases, if they are to mitigate the unintended consequences of this change. This is to ensure that current levels of long-term commercial property investment into UK towns can be maintained, along with the benefits this brings to public and private sector occupiers alike.”
Owen Spencer, senior lawyer (corporate occupiers) at Forsters, said: “If you thought you just heard a cheer, it might have been tenants celebrating - the ban on upwards-only rent reviews has now passed into law. But if you are a business looking to sign a new lease shortly, don’t uncork the sparkling wine just yet. At first glance, this is a win for occupiers, but the reality is more nuanced.
“Upwards-only rent reviews became the standard for a reason, providing certainty to investors and lenders in a market heavily shaped by inflation risk. Removing the mechanism doesn’t eliminate this risk, it simply forces landlords and their lenders to find new ways to mitigate it. So, what might we see? Shorter lease terms, higher headline rents, more frequent reviews, and increased use of indexation or stepped rents. In some cases, these alternatives may result in increased rental pressures and reduced tenant security. Lack of investor confidence could dampen future development, tightening the already chronic undersupply of stock and driving rents higher still. In many cases, these alternatives may leave occupiers actually facing higher costs than before.”
This article will be updated with comment.